Nasdaq Dubai
The Islamic Development Bank, based in Saudi Arabia, issued its second tranche under its sustainable finance program for $2.5 billion in March this year with the money raised to be used to finance or refinance eligible green and sustainable projects. Image Credit: Supplied

Dubai: Sukuk [or Islamic bonds] issuances across GCC countries are set to decline this year according to projections by rating agency Moody’s. Sukuk issues are down 19 per cent from a year ago in the first six months to $35.3 billion due to a significant drop in sovereign issuance, which was only partially offset by higher corporate volumes. The sharp decline is attributed to significant gains in oil prices.

Moody's expects further decline in Islamic bond issuance in the second-half of the year. Higher oil prices have lowered the gross financing requirements of oil exporting countries relative to 2020. However, new corporate issuers are expected to partially offset the lower volumes from the sovereign side.

According to Moody’s Saudi Arabia will remain the largest issuer in the GCC. All domestic issuances by the government since July 2017 have been in sukuk format and it has been increasing the share of domestic borrowing in the overall funding mix. Kuwait will also be a key player, supported mainly by short-term issuance by the central bank and longer term issuance by commercial banks.

Sukuk issuance is slowing in GCC
Sukuk issuance will be flat or slightly lower this year, as higher oil prices have reduced sovereign funding needs in GCC, says Moody’s.

Saudi Arabia remained the largest issuer in the GCC accounting for around 62 per cent or $22 billion of the total volume (down from $24.5 billion in H1 2020). The government dominated but its share of issuance dropped to 58 per cent in H1 2021 from 88 per cent in H1 2020. The contribution from Saudi corporates and banks rose to 30 per cent, supported by a $6 billion debut issuance by Saudi Aramco.

Oman returned to the international sukuk market in June after two years, issuing $1.75 billion, its second largest issuance to date. Kuwait was the second-largest issuer in GCC issuing $7.2 billion, up 11 per cent year-on-year, mainly due to banks.

In contrast, issuance by UAE and Bahrain dropped by 65 per cent to $4 billion in the first-half, from $11.6 billion a year ago due to weaker government activity. Qatar was the only country in the GCC with no sukuk issuance during the first six months of the year.

Significantly lower funding needs this year compared to 2020 meant no sovereign sukuk issuance in the first-half. Meanwhile, strong liquidity in the interbank market prompted banks and corporates to raise funding from private and syndication markets.

New entrants

While Moody's excepts activity among other GCC countries to remain muted, its forecast shows sukuk market to maintain its long-term growth trend backed by new entrants, low penetration and innovative new Islamic products, such as 'green' sukuk.

There has been a steady stream of new entrants. Saudi Aramco and the Maldives government made debut issuances in the first-half of this year. Aramco issued a total of $6 billion distributed over three tranches for three-, five- and 10 years. The Maldives government issued a total of $300 million in sukuk in April with a tenor of five years. 

According to Moody’s sukuk remain under-represented in global finance, comprising only 5 per cent of global financial assets. By comparison, the Muslim world population, at around 1.8 billion and expanding, makes up 24 per cent of the global population. Many majority-Muslim countries, such as Turkey, Indonesia and Malaysia are promoting growth of Islamic finance to meet the needs of their populations and to diversify their financing mix.

Green future

Moody's sees strong potential for the green sukuk will provide further support for the market. There has been strong growth in such sukuk issues since the first paper was placed in the market by Malaysia’s Tadau Energy (Edra Power) in 2017. Nevertheless, the market remains in its infancy, accounting for only 3 per cent of total sukuk issued.

“We expect green sukuk issuance to accelerate, particularly in Southeast Asia and GCC as they seek to attract private capital to low-carbon and climate-resilient infrastructure projects," said Ashraf Madani, a VP-Senior Analyst at Moody’s. "The latest issuance was a $750 million five-year instrument from the Government of Indonesia to finance sustainable projects.” 

Indonesia has now three green sukuk listings on Nasdaq Dubai, including the world’s first sovereign green sukuk, issued in March 2018 for $1.25 billion. The Islamic Development Bank, based in Saudi Arabia, issued its second tranche under its sustainable finance programme for $2.5 billion in March this year with the money raised to be used to finance or refinance eligible green and sustainable projects.